Commentary

Will N.B. Catch A Bigger Economic Flu Than The Rest Of Canada?

Richard Saillant. Image: submitted

Richard Saillant is an economist and public policy consultant based in Moncton. 

Many are wondering whether New Brunswick is more at risk economically than the rest of the country as this novel coronavirus is upending our lives here in Canada and around the world. To examine this issue, we need to answer at least two questions.

The first is whether economic activity in the province as a whole is likely to decline more than elsewhere. This means looking at both the private and public sectors.

In New Brunswick, the public sector (federal, provincial, municipal and aboriginal) directly accounts for a bit over one third of the economy (34.4 percent). In Canada as a whole, it accounts for about one-quarter (25.7 percent). Governments across Canada, whether federal or provincial, are not likely to proceed to mass layoffs. Rather, they are more likely to keep paying people with their credit cards. This option is not available to most other employers.

In other words, the greater public sector presence in New Brunswick acts as a more potent “automatic stabilizer.” As a result, for overall economic activity in New Brunswick to decline more than in Canada as whole, the private sector in New Brunswick needs to be hit harder than elsewhere.

Just how much? A quick back-of-the-envelope calculation suggests that, as the public sector is about 10 percentage points greater in New Brunswick than in Canada, the private sector, which accounts for about two-thirds of our province’s economy, needs to drop by 15 percent more than in the rest of the country for the overall economic impact of the crisis to fall in the same range.

How likely is this? Not very.

There are, to be sure, a few sectors of particular importance to our province that are being hit very hard by the big hole the coronavirus is creating in our economy.

Take, for example, the fisheries. With the cruise industry on the respirator and fancy restaurants effectively closed down in many parts of the world, demand for luxury products such as lobster, crab and oysters is likely collapsing, which means much lower prices. That’s not counting the fact that fishing seasons may be in jeopardy due to social distancing requirements.

While we are on the topic of primary industries, let’s turn to another big contributor to our economy, forest products. Here, the outlook is much more difficult to assess.

To be sure, millions of people temporarily losing their jobs is unlikely to provide an immediate boost for the construction industry. Nor are immigration flows grinding to a halt. Having said this, in fighting this crisis, financial authorities have turned the monetary spigots wide open around the world, which means lower interest rates.

This could eventually mean stronger demand for residential construction, and thus forest products. Furthermore, as oil prices have tanked with lower global demand and the implosion of OPEC+, the loonie is down, which should favor New Brunswick forest products exporters.

Many other sectors are being hit hard by the crisis. The travel and tourism industry is first in line. On the whole, though, New Brunswick’s industry is not any bigger than Canada’s. Likewise, the restaurant and accommodation and entertainment sectors are also important to New Brunswick, but not more so than in the rest of the country.

We could go on with our industry-by-industry analysis for a long while. The reality, however, is that New Brunswick’s private sector is likely to be more sheltered than in the rest of the country for a simple reason: it is more geared towards servicing public dollars than elsewhere.

What do I mean by that? Simply that a much larger share of our economic pie can be traced back to public dollars. Take, for instance, Old Age Security benefits and EI. New Brunswick has more seniors and a greater share of them have low income.

This means more Old Age Security and Guaranteed Income Supplement dollars circulating in the economy to pay for basic things such as shelter and groceries. The same applies for EI: for every dollar sent to Ottawa, New Brunswickers get two in return.

Take also public sector wages. In New Brunswick, the public sector accounts for about 28 percent of total jobs. In Canada, it’s 22 percent. Total compensation in the public sector (salary and benefits) is about 80 percent higher than in the private sector. This reflects primarily the fact that public sector jobs typically require higher qualifications.

Overall, it can thus be safely assumed that around 40 percent of compensation dollars circulating in the New Brunswick economy directly comes from the public sector. Again, this means that businesses catering to public sector dollars — assuming they are allowed to stay open, which will not be the case for some businesses for weeks or even months — are likely to be less affected by lost purchasing power from consumers.

To be sure, in the very short run, New Brunswick’s (smaller) private sector is being hit very hard by strict social distancing measures that are forcing many to close down temporarily or significantly curtail their operations.

However, once some of the current restrictions will be lifted (no one knows for sure when this may happen), the reality is that New Brunswickers will likely have lost less purchasing power and could thus be in better shape to resume spending.

In a nutshell, although the economy could likely go through a few very rough quarters, New Brunswick is likely to be more sheltered from the effects of the crisis simply because the economies that suffer the most from a downturn are typically those that were more dynamic coming into it. The reality is that New Brunswick is less dynamic, depending more on public dollars than Canada as a whole.

This, in turn, brings us to another critical question about the risks of this crisis for the province. New Brunswick is in a perilous fiscal situation. A crisis of yet unknown, but likely very large scale, will do nothing good for the province’s books, particularly if the current liquidity crisis affecting many New Brunswick businesses turns into an outbreak of insolvencies.

And then there is Ottawa. I have been arguing for a while that New Brunswick cannot hope to maintain its health care services without further help from Ottawa. The latter could be adding well over a hundred billion dollars to its debt to deal with the effects of this crisis.

Historically, Ottawa has dealt with its fiscal troubles by becoming less, not more generous towards provinces. Let’s hope past behaviour will not prove to be the best predictor of future behaviour this time around.

Huddle publishes commentaries from groups and individuals on important business issues facing the Maritimes. These commentaries do not necessarily reflect the opinion of Huddle. To submit a commentary for consideration, contact editor Mark Leger: [email protected]